Today, Nav Athwal goes over how crowdfunding works for investors needing to borrow capital.
From the initial application to getting approved, closing the deal, and funding, find out how the crowdfunding process works.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Nav: Hello, and thank you for joining us for the REI Classroom. My name is Nav Athwal. I’m the founder and CEO of RealtyShares.com. Today, we’re going to tell you a little bit about how crowdfunding for real estate works, the process to get a loan through this new mechanism, this new innovation called crowdfunding.
Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.
Nav: Again, I’m very passionate about this topic myself because I do run a crowdfunding for real estate platform where I’ve seen the process work for over 250 different assets that we funded through the platform. So very excited to talk about a topic that’s very near and dear to my heart.
So if you’re a borrower, once you have a property in your contract, you’re typically then trying to arrange your financing. You may go to a conventional bank, you may think about a hard money lender, and now there’s this new innovation called crowdfunding where you can get capital in a much faster, more efficient way than you can with the bank and typically at rates that are going to be cheaper than hard money, just based on the efficiencies that crowdfunding does create.
So the process really works with an online application process. You’re a borrower, again, you have a property under contract and you’re ready to get your loans, so you fill out a short application. We have a short one at RealtyShares.com that you can take as little as a minute to complete.
Once that application is submitted and you submit some general information about yourself, your track record, and the property you’re looking to fund, then you’ll be given a price for the loan. You’ll typically be given how many points you’re going to be charged at origination, as well as the interest rate at which you’ll be paying your loan back at.
Most of the loans that you see through crowdfunding today are short term loans, 6 or 12-month duration loans. So you’ll see the rates that are typically going to be the 9 to 11% range. So it’s still cheaper than hard money, but definitely not as cheap as conventional financing. But again, you’re filling a need that conventional banks aren’t providing, which is short-term bridge loans.
Once you’re pre-qualified and you’re given your interest rate in points, then you’re given the option to proceed with the application at the agreed upon pricing, and submit additional documents such as an appraisal, your information, so that a credit and background check can be conducted. Any other information you may have on the property, like a purchase contract or a title report, that information is then reviewed by the crowdfunding platform. Typically, it can take anywhere from one to three business days to get that process fully reviewed and get your loan approved.
After which, you’ll be issued a LOI or pre-approval letter, so you’ll know that the loan and terms are moving forward, and you can expect to close usually within 7 to 10 days after that. So once the approval letter is signed, your property is then listed on the crowdfunding platform. If you’ve ever funded something through the Kickstarter or Indiegogo, you probably know what that process looks like.
Your deal will be listed on the platform, and then investors that want access to your deal, like the deal, like the borrower, like the return profile, are able to invest small amounts in that loan through usually an LLC or other special purpose vehicle.
The investment minimums can be as low as a thousand, but it’ll see it as high as 5,000. So you’ll aggregate a lot of investors that want to fund your loan. That funding process, again on our platform RealtyShares, it’s probably consistent throughout the industry. It can take anywhere from one day up to three to four days.
After the funding is complete, then you do your typical closing process. You have an escrow or title company that will handle issuing the title policy for the lender and the owner, making sure the funds are wired in to close the loan, as well as making sure the loan docs are signed and recorded, which will typically include a promissory note, a deed of trust, as well as a personal guarantee if applicable.
All in with the crowdfunding process from start to finish, from that pre-approval application to truly having money in the bank account to buy the loan or the escrow, is going to take anywhere from 10 to 14 days. So very fast, very efficient process, and you’re able to get capital, again usually at 200 to 300 basis points, two to three percent cheaper than your local hard money lender.
So that’s a little bit about how crowdfunding your next loan works. Very excited to tell you a bit more, and I’ll see you next time.
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